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The Asset Class: Siobhan Simpson · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  We've spoken about active versus passive investing on so many occasions,
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  but today we're going to talk about it with a specific context.
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  We're going to talk about the risks beneath the index, the opportunities
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  beyond the concentrated nature of the bull market we've seen in
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  2025 in the S&P 500, the Nasdaq,
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  and specifically the JSE Securities Exchange in Johannesburg.
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  With me now is Siobhan Simpson, head of SA Unit Trusts at 91 in Cape Town.
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  Give us a bit of background, if you would, Siobhan, to what concentration actually
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  means.
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  Sure, Lindsay.
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  I think just to start off, I think often let's just talk firstly just about active
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  versus passive.
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  I think sometimes that's the wrong framing.
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  It should be active and passive because portfolios are built on both.
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  And I think we often forget that and we need to incorporate elements of both.
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  How much of each and when to...
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  decrease or decrease is probably a little bit about the timing and the debate around
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  that.
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  Shifting to your concentration, I think both globally and locally,
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  it's very clear that both indices that we kind of anchor to the S&P 500 and
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  obviously our local
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  Aussie are very concentrated and different sort of sectors are driving each.
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  Globally, it's been a case of those magnificent seven now at crazy all time
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  sort of highs of concentration levels.
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  And locally, it's been a case of the resources.
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  22% two and a half years ago.
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  Now that sits up more than 40%, sits at 31.3%.
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  And really underlying that, it's largely precious metals.
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  More than a quarter of the Aussie now is made up of those precious metals stocks,
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  only seven of those stocks.
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  Anglo and gold, Ashanti and goldfields were at the end of 2023, were 5.5%.
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  now nearly 15%, which is quite a crazy increase.
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  Yes, it is.
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  But on the other hand, if it's justified, then what's the problem?
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  I can understand in the United States, for example, Siobhan,
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  there's the Magnificent Seven and other companies that are mainly focused today on
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  AI.
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  You think, well, I have to be in that particular stock because of its market
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  capitalization, and I'm an index tracker.
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  And that is what my mandate is.
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  As it gets bigger, I have to get bigger as well.
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  So it becomes a self-fulfilling prophecy, doesn't it?
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  As it gets bigger, then it gets bigger, if you see what I mean.
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  Has the same situation prevailed in the JSC when it comes to those diggers, as
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  you've just described them as, you know,
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  the Anglo-Americans, for example?
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  Yeah, you're right, Lindsay.
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  And actually what happens when you get bigger, you're anchoring to yesterday's
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  winners, right?
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  Those are the strategies that, you know, drove the market yesterday and not
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  necessarily what will drive the market in five years' time.
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  The JSC has often been a concentrated market,
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  but that concentration changes in terms of what makes up that.
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  It's changed globally over the decades and it's changed locally as well.
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  I think you'll remember years gone by leading up into after the mid
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  2000s. It was all about the China centric resources.
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  Now it's all about the precious metals and through time and our largest stocks, you
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  know, Naspers and...
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  And a few of the other big round hedges also drive it.
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  So, you know, our JSC is a very concentrated market.
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  The top 25 companies making up 75% of the index.
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  So are you saying that there are other companies out there that are being ignored
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  because of the dominance of passive investors?
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  I'm not saying ignored,
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  but I just think sometimes when the market indices are so concentrated that investors
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  are missing the
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  opportunity to buy things that might not be as big in the market.
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  shares that might be big in five years time that you're glossing over because
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  you're just following the passive indices.
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  Are you glossing over them because they're not part of the small concentration that
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  we've spoken of on both the S&P 500
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  and also on the JSC?
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  Or are they being glossed over because they're not part of the same industry that
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  is doing well, the same sector,
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  if you see what I mean?
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  Again, I'm putting it rather clumsily.
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  Probably a bit of both, to be honest.
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  So AI is in sort of vogue now and obviously with proper sort of substance
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  behind it.
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  I'm not saying that it's a flash in the pan,
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  but it might not be as big in 10 years time.
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  So if you go back, the concentration in the market is not new.
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  In the 60s and the 70s, we had the nifty 50, which was a group of large cap growth
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  stocks like Coke.
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  Coca-Cola, Disney, IBM that drove the market, they were sort of 20, 23 to 25% of
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  the S&P.
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  In the dot-com bubble, you had Cisco and Intel and Microsoft making up about, I
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  think, a peak.
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  It was around 27%.
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  So the concentration is not new.
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  It just shifts to what will be probably different in 10 years' time.
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  So those AI stocks will probably not be as big in 10 years' time.
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  as part of the market.
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  Let me give you a couple of examples now, if I can, Siobhan.
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  Let's say that the big companies in the United States of America focused on AI,
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  spending hundreds of billions on research and development,
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  etc.
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  And you tend to not be able to look beyond that.
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  But there are auxiliary companies circling these magnificent companies, the
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  magnificent 7 Plus.
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  Suddenly auxiliary companies benefit from that 750,
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  800 billion CapEx spend that is forecast for 2026.
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  So you start to look at these auxiliary companies and you say, right,
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  we should be looking at that and we shouldn't be focusing so much on the
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  really, really big ones.
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  And the same may be on the JSE.
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  Because of the big companies doing so well from digging the stuff out of the ground,
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  they're paying the government more in taxes.
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  And therefore the government is able to spend on other sectors like
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  infrastructure, for example.
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  And an infrastructure company that's listed on the JSE might start doing well.
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  Simplistic, but a fairly decent argument, I think.
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  Correct.
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  And those second, third round effects, definitely.
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  And sometimes those companies are trading at better valuations and there's
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  potentially better growth prospects than the
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  ones that are already in the spotlight.
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  So that when you have a lot of market concentration, generally you also have a
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  greater dispersion of the potential returns going
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  forward as well.
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  Okay.
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  So you're not saying passive is bad.
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  What you're saying is a combination of passive and active is probably more
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  optimal.
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  Absolutely.
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  And so I think the call to action for all investors is to just look at what
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  proportion of your portfolio is in passive,
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  consider whether that reflects the current environment,
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  and think about whether some active exposure could complement what you've got.
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  Because I think structurally, the opportunity set for active investors at
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  the moment is definitely expanding
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  because of that concentration, because of those differences in valuation and growth
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  prospects.
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  And thirdly, the global economy is just undergoing the structural...
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  change when it comes to technological disruption and this geopolitical
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  realignment.
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  You sum up the article that you kindly sent me by saying the bottom line is as
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  follows, and you've got three points.
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  First, concentration within major equity indices has increased significantly,
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  making market outcomes more dependent on a relatively small number of companies.
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  Does that make a potential sell-off, Siobhan, a potential sell-off in the
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  market, a correction in the market, more likely.
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  because of it being concentrated on those few companies?
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  It makes a sell-off more risky for someone holding a passive instrument.
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  It's not going to necessarily cause a sell-off, but yes,
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  in previous cases there has been at some point.
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  That's the turning point.
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  There's been a global company that's done some really nice work on whether
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  concentration is statistically
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  relevant to returns going forward.
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  And ultimately, they looked at if you had an equally weighted portfolio versus a
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  market-weighted portfolio.
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  Equally weighted, outperforming the market-weighted, would mean that the
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  bigger stocks actually underperformed the smaller stocks.
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  It means investors would have been better off by allocating money away from those
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  passive portfolios.
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  And what they found is that the higher the concentration, the greater the
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  outperformance of that equally weighted portfolio for the next
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  five years.
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  So really...
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  deviating from the market at a time when concentration is high,
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  has been a winning strategy if you look back on past returns.
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  The second point of your bottom line is as follows.
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  Second, it says differences in valuations and growth prospects between sectors and
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  individual companies have widened,
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  creating greater dispersion in potential returns.
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  So because companies are being ignored, then the investment is not coming into
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  those companies.
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  So they're sitting there almost dormant.
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  And that's why you need an active manager with a passive element.
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  100%.
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  And ultimately, that goes for companies as well as sort of geographical locations,
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  right?
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  The US historically has been the place where everyone's wanted to invest.
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  And I think there's been some indication and first signs that there's some money
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  moving towards
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  emerging markets.
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  Final point is about the global economy.
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  Maybe you can explain that one, because what does the global economy got to do
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  with active versus passive?
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  So over to you on that one.
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  That's a little bit about what I've just explained with regards to the US, right?
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  So the global economy at the moment is structurally adjusting to this
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  technological disruption,
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  which you've spoken quite a lot about with AI.
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  There's obviously a lot of geopolitical realignment and involving supply chains.
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  And that's, I mean, very, very active and very...
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  live at the moment.
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  The US, like I said, now has driven the market over the last 10 years.
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  But if we look forward and we look to where we think the returns will come from
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  over the next 10 years,
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  it's not the US.
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  And so that is the shift from where will be the heartbeat, I suppose,
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  and the driver of returns will be less from the US and more from other places
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  like emerging markets.
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  Final question, Siobhan.
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  Are you at 91 finding that there are more opportunities is because of the very
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  concentration risks that we've been speaking of.
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  Yeah, I think that's exactly the point that we started off, Lindsay.
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  The opportunity set for active management at the moment, we feel, is very,
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  very exciting because of these structural changes in the market and where we sit.
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  Siobhan, thank you so much for your insight.
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  Siobhan Simpson is Head of SA Unit Trust at 91 in Cape Town.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams and
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  various contributors and do not reflect the policy,
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  position, or opinion of any other agency, organization, employer,
• 10:59
  or company associated with Strictly Business Podcast.com.
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  Assumptions made on the analyses are not reflective of the position of any other
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  entity other than the speaker or the author.
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  And since we are critically thinking human beings, these views are always subject to
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  change, revision,
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  and rethinking at any time.
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  Please do not hold us to them in perpetuity.